Deceleration of economic growth was expected

According to the flash estimate of Statistics Estonia, GDP growth in Estonia decelerated to 0.6% in the second quarter of 2016 (in the first quarter, Estonian economy grew by 1.7%). Deceleration of the growth rate was expected.

First quarter economic growth was largely supported by strong private consumption and a rise in excise taxes on alcohol and motor fuels (part of net taxes on products). At the same time, the contribution of other economic activities to GDP growth remained rather low. According to the flash estimate of the Q2, net taxes on products have decreased in the second quarter, having a negative effect on economic growth.

Even though the annual growth in export volume of goods has accelerated to 5%, it has been quite narrow-based, mostly originating from the electronics sector. Unfortunately, the value added on products in this sector is quite low and the growth in export volume has not had an effect on GDP growth yet. In addition, import grew two percentage points more than export, which has a negative impact on economic growth. During the last few months, expectations of industrial companies on the growth of export turnover have improved, although they are not too confident about their competitiveness in foreign markets.

Strong private consumption supported the growth of the value added in whole and retail sales. According to preliminary data, value added in the manufacturing sector increased after 4 quarters of decline. On the other hand, value added in the transportation sector has been declining for the past two years.

Investments, most probably, decreased (or the growth was very weak). Corporate sector credit portfolio has increased fast this year. Although new credit goes primarily to commercial real estate, capital investments have increased, as well. Due to an increase in the imports of capital goods and a decent credit growth in the business sector, we expect a decline in investment volumes to recede.

We expect that the GDP growth will accelerate in the second half of this year, supported by robust consumption, exports and an improvement in investment volumes. However, due to the stronger-than-expected imports and weaker-than-expected investments, we shall revise down our current GDP forecast (2%) for this year.

Source: Swedbank

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